2014 (8) TMI 42 - HC - Income Tax

High Court: Profit from FSI sale ineligible for deduction under Section 80IB(10). Importance of FSI in development highlighted.

Commissioner of Income Tax-I Versus Desai Developers

The High Court ruled that profit from the sale of unutilized Floor Space Index (FSI) is not eligible for deduction under Section 80IB(10) as it should be ... Deduction u/s 80IB(10) r.w. section 80IB(1) – Profits derived from sale of unutilized FSI – Profits eligible for deduction or not and the profits not derived from the business activity of development and construction of a housing project – Held that:- The profit relatable to the sale of unutilized FSI would not be eligible for deduction under sec. 80IB(10) of the Act - Following the decision in The Commissioner of Income Tax-I Versus Moon Star Developers [2014 (4) TMI 1042 - GUJARAT HIGH COURT] - marginal underutilization of FSI certainly cannot be a ground for rejecting the claim u/s 80IB(10) of the Act - Even if there has been considerable under-utilization, if the assessee can point out any special grounds why the FSI could not be fully utilized, the case may stand on a different footing - in cases where the utilization of FSI is way short of the permissible area of construction, looking to the scheme of section 80IB(10) of the Act and the purpose of granting deduction on the income from development of housing projects envisaged, bifurcation of profits arising out of such activity and that arising out of the net sell of FSI must be resorted to - none of the assessees have made any special ground for non-utilization of the FSI - The finding recorded by the AO is on appreciation of evidence and it has never been disputed by the assessee - when the factual aspect with respect to the total permissible FSI available for construction; the FSI utilized by the assessee and the FSI unutilized by the assessee is available on record, there is no question to remand the matter to the AO – Decided in favour of Revenue. Issues Involved:1. Deduction under Section 80IB(10) read with Section 80IB(1) on profit derived from the sale of unutilized Floor Space Index (FSI).2. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961.Issue-Wise Detailed Analysis:1. Deduction under Section 80IB(10) read with Section 80IB(1) on Profit Derived from Sale of Unutilized FSI:The primary issue in this case was whether the Income Tax Appellate Tribunal (ITAT) was correct in allowing the deduction under Section 80IB(10) read with Section 80IB(1) to the assessee on profit derived from the sale of unutilized FSI. The Assessing Officer (AO) had disallowed the claim of Rs. 32,81,410/- under Section 80IB(10), arguing that the profit attributable to the sale of unutilized FSI was not derived from the business activity of development and construction of a housing project.The Division Bench of the High Court had previously ruled in a similar case (Tax Appeal No. 549/2008) that profit from the sale of unutilized FSI is not eligible for deduction under Section 80IB(10). The court emphasized that the concept of FSI is crucial in development activities, and underutilization of FSI by the assessee ranged significantly, from 11.14% to 65.81%. The court noted that the sale price of constructed properties is influenced by the built-up area and the available FSI. Therefore, the profit from the sale of unutilized FSI should be distinct and separate from the profit from the development and construction of housing units.The court further elaborated that Section 80IB(10) does not mandate 100% utilization of FSI for deduction eligibility. However, substantial underutilization without special grounds (e.g., height restrictions, overhead high-tension wires) cannot justify the claim for deduction under Section 80IB(10). The court concluded that the ITAT's decision to allow the deduction was incorrect, and the question was answered in favor of the revenue and against the assessee.2. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961:The second issue involved the disallowance of Rs. 22,44,480/- under Section 40(a)(ia) of the Income Tax Act. The CIT(A) had deleted this disallowance, and the ITAT upheld the CIT(A)'s decision. However, the Division Bench of the High Court had already answered this question in favor of the assessee in a previous order dated 31.3.2014. Therefore, the court did not consider this issue further in the present appeal.Conclusion:The High Court, following the precedent set by the Division Bench in Tax Appeal No. 549/2008, ruled that the profit from the sale of unutilized FSI is not eligible for deduction under Section 80IB(10). The court dismissed the request to remand the matter to the AO for recalculating the unutilized FSI, as the AO had already provided detailed and undisputed particulars regarding the permissible, utilized, and unutilized FSI. Consequently, the appeal was allowed in favor of the revenue, and the substantial question of law was answered against the assessee. No order as to costs was made.